Distributions Prior to Age 59-1/2

Are IRA distributions taken before age 59 ½ subject to additional tax?

IRA distributions generally are subject to income tax, and a 10 percent early distribution penalty tax applies if the IRA assets are distributed before the IRA owner turns age 59½, unless a penalty tax exception applies. IRA assets that represent after-tax dollars (e.g., nondeductible Traditional IRA contributions, Roth IRA contributions) are not taxed when distributed because these assets have already been taxed. Tax laws provide several exceptions to the federal penalty tax.

How to I pay the early distribution penalty tax if I do not qualify for a penalty tax exception?

If you take a taxable IRA distribution before age 59½ and that distribution is subject to the 10 percent early distribution penalty tax, you may need to file IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, along with your federal tax return to report and pay the penalty taxes owed.

If I am a beneficiary of an IRA under age 59½, am I subject to the 10 percent penalty tax for my IRA distributions?

No. Distributions made to IRA beneficiaries after the IRA owner’s death are exempt from the 10 percent early distribution penalty tax. Note, however, that if you are a spouse beneficiary and you roll over or transfer distributions from your deceased spouse’s IRA into your own IRA, subsequent distributions taken before age 59½ will be subject to the 10 percent early distribution penalty tax, unless you qualify for a penalty exception.

Under what circumstances does disability qualify as an exception to the early distribution penalty tax?

To meet the disability exception, you must satisfy the definition of disability found in Internal Revenue Code (IRC) Sec. 72(m)(7). Generally, to qualify, an individual’s disability must preclude her from engaging in gainful employment and must be of long-continued and indefinite duration or is expected to lead to death.

How do I qualify for the first-time homebuyer early distribution penalty tax exception?

You may take an IRA distribution penalty-free before age 59½ for first-time homebuyer expenses if you are using the distribution to pay for the acquisition costs of a primary residence for your spouse, child, grandchild, or ancestor who has had no ownership in a home for two years preceding the acquisition. There is an aggregate lifetime individual limit of $10,000 for which you can receive a penalty tax exception.

Under what circumstances can I use the unreimbursed medical expenses penalty tax exception?

To claim this penalty tax exception, you must have unreimbursed medical expenses that exceed 10 percent (7.5 percent before January 1, 2013) of your adjusted gross income.

Under what circumstances can I use the health insurance penalty tax exception?

To claim this penalty tax exception, you must have been receiving unemployment compensation for more than 12 consecutive weeks. You must take IRA distributions either in the year you receive the unemployment compensation or in the following year. You cannot take an IRA distribution that qualifies for this exception any later than 60 days after you are reemployed.

Under what circumstances can I use the higher education expenses penalty tax exception?

To claim this penalty tax exception, you, your spouse, children, grandchildren, or ancestors of you or your spouse must have qualifying higher education expenses, such as tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible education institution.

What is the “substantially equal periodic payments” exception to the 10 percent early distribution penalty?

Those who wish to take regularly scheduled distributions from their IRA before age 59½ can avoid the early distribution penalty tax if they establish a stream of payments according to the “substantially equal periodic payment” rules. To qualify, payments must be based on either the life expectancy of the IRA owner or the joint life expectancy of the IRA holder and his beneficiary. In addition, payments must be made no less frequently than annually and must continue for five years or until the IRA owner reaches age 59½, whichever is longer. Because of the complex nature of this penalty exception and the significant adverse tax consequences that can result if the exception is applied incorrectly, individuals who want to take advantage of this penalty exception should seek the assistance of a competent financial or tax advisor.

What are the 10 percent early distribution penalty tax exceptions?

The early distribution penalty tax does not apply if your distribution is taken for any of the following reasons (subject to certain restrictions).

Payments to beneficiaries after an IRA owner’s death
Disability (permanently disabled under the IRS definition)
First-time homebuyer expenses
Unreimbursed medical expenses that exceed a certain amount of income
Health insurance premiums during unemployment
Qualified higher education expenses
IRS levy
Substantially equal periodic payments
Qualified reservist distributions

What is the qualified reservist distribution penalty tax exception?

Qualified reservists called to active duty after September 11, 2001, for a period of at least 180 days or more may take penalty-free distributions from IRAs between the date of the order or call to duty and the end of the active-duty period. Such qualified reservists may recontribute these distributed amounts to IRAs within two years after the end of the active-duty period. The applicable IRA contribution limits do not apply and a qualified reservist may not take a deduction for the recontributed amounts.